Liquidity pool

What it refers to

A liquidity pool is a set of tokens held in a smart contract that traders trade against, rather than trading with a matching buyer or seller. Most pools hold a pair of tokens, and an automated market maker (AMM) formula sets the price from the balance between them: each trade adds one token to the pool and takes out the other, which moves the price.

Liquidity providers deposit the tokens, usually in return for a share of the fees that trades pay. The larger a pool is relative to a trade, the less that trade moves the price, which is why pool depth shapes slippage.

Why this concept exists

Decentralized trading has no central party to match orders. A pool lets anyone trade against tokens held in a contract, and lets anyone supply those tokens. Each pool lives on one network, though, so the same pair can sit in many pools across many networks, each with its own depth. That is a main source of liquidity fragmentation.

What this changes for system design

For a new app or a new asset, depth does not appear by itself: someone has to seed a pool and keep enough tokens in it, network by network, for trades to clear without large price moves.

Apps that call the SODAX API do not need to bootstrap pools of their own. Fills on SODAX draw on two layers: the SODAX Liquidity Inventory, owned by the SODAX DAO, and addressable liquidity, the local DEX, aggregator and AMM liquidity already on each network. SODAX routes, quotes and settles, a permissioned solver within the SODAX system performs the fill, and SODAX does not hold, own or deploy the capital.

Related terms

• SODAX liquidity: the two layers fills draw on
• Addressable liquidity: pools and venues on each network
• Liquidity inventory: the DAO-owned system-level layer
• Effective liquidity: the depth usable in practice
• Slippage: how depth affects price
• Liquidity fragmentation: pools split across networks